When someone is facing a difficult financial situation, it can be tempting to pull money from whatever resources are readily available. Many consumers feel they have no choice but to dip into their retirement savings to pay for financial emergencies or unexpected expenses. In fact, according to a recent study published by Magnify Money, more than half of all Americans have withdrawn money from their retirement savings early.
Twenty-three percent of those surveyed stated that they did so to pay off debt. Another 17 percent used this money to put a down payment on a home, while 11 percent used the money to pay for education costs. Nine percent surveyed reported using money from their retirement savings to pay down medical debt.
Millennials, namely those between the ages of 22 and 37, were more likely than other generations, such as Gen X or Baby Boomers, to pull money out of their retirement savings early. Millennials see education as more of a priority than saving for retirement, according to Magnify Money’s survey. Fifty-nine percent of them said they would take money from their retirement accounts to pay for their children’s college expenses to keep them from having to take student loans out to pay for college, according to a survey published by Ameriprise.
No one can fault the good intentions that go along with this line of thought, but financial experts are adamant that this is one of the worst things a person can do. Taking money out of a retirement account early can easily derail that person’s retirement plan. It can be very difficult to recover from even a minimal withdrawal.
The reason that withdrawing money early from a retirement account derails progress on savings has to do with the theory of compound interest. The longer money is in an account, the more interest it earns over time, thus growing the balance. Reducing the amount of money in the account will only make that accrued interest less, and unfortunately, the progress that would have been made in saving that money can never be regained once it is lost. The most successful savers find that starting early is the best way to truly grow money in a retirement account.
Not only does taking money out of retirement early delay progress on savings, it can also lead to some major penalties and fees. With a traditional 401(k) plan, if the accountholder takes money out before turning 59 ½ years old, he or she will face a 10 percent penalty. Taking out a large amount of money can also push the person into a higher income tax bracket, and these withdrawals will be included on the individual’s tax return. Penalties are a little more flexible if the individual is taking out of a Roth IRA. The penalty is still 10 percent, but it applies to any interest accrued on contributions if the withdrawal is done before the individual turns 59 ½. Taxes will also be assessed on the withdrawal from a Roth IRA.
One of the worst things a person can do is use retirement savings to pay down debt when he or she is considering bankruptcy. Retirement accounts, specifically 401(k) plans, are protected by the Employee Retirement Income Security Act (ERISA), which means creditors cannot gain access to retirement accounts to satisfy a debt, so long as the money remains in the account. These accounts are also protected under Florida’s bankruptcy exemptions. The last thing a person would want to do is lose out on this money by withdrawing early and still filing for bankruptcy. It may be best to consult a bankruptcy attorney to discuss your options before making any decision to withdraw retirement savings early.
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If you have questions on this topic or are in financial crisis and considering filing for bankruptcy, contact an experienced Miami bankruptcy attorney who can advise you of all of your options. As an experienced CPA as well as a proven bankruptcy lawyer, Timothy Kingcade knows how to help clients take full advantage of the bankruptcy laws to protect their assets and get successful results. Since 1996 Kingcade Garcia McMaken has been helping people from all walks of life build a better tomorrow. Our attorneys’ help thousands of people every year take advantage of their rights under bankruptcy protection to restart, rebuild and recover. The day you hire our firm, we will contact your creditors to stop the harassment. You can also find useful consumer information on the Kingcade Garcia McMaken website at www.miamibankruptcy.com.
